Venezuela Seen Delaying Devaluation Amid Chavez’s Cancer

Venezuelan President Hugo Chavez’s battle with cancer will defer an expected devaluation by three months as his convalescence in a Cuban hospital delays economic decision-making, according to a survey of analysts.

Venezuela will weaken the official bolivar rate 33 percent to 6.4 per dollar in the second quarter, generating more revenue in local currency from each dollar of crude exports, according to the median estimate of 12 analysts surveyed by Bloomberg. In a poll taken in July, economists expected a devaluation of the same size in the first quarter.

Speculation over a devaluation mounted this week after Vice President Nicolas Maduro said Chavez had drawn up new plans to boost exports from his hospital bed in Havana. Chavez hasn’t been seen in public since undergoing cancer surgery in Cuba six weeks ago. Venezuela needs to weaken the bolivar and boost fiscal revenue after government spending leaped in the year preceding Chavez’s Oct. 7 re-election. Morgan Stanley has estimated the 2012 fiscal shortfall was 12 percent of gross domestic product.

“The devaluation will take place according to what’s happening in the political sphere and the uncertainty surrounding the president’s health,” Barclays Plc economist Alejandro Arreaza said. “If the president’s circumstances trigger presidential elections in April or May, the decision to devalue will be postponed until July.”

Chavez’s death or resignation would lead to elections within 30 days, according to the constitution.

Mounting Shortages

Inflation-adjusted spending rose 25.5 percent in the year before the election, according to Francisco Rodriguez, senior Andean economist at Bank of America Corp. in New York.

Now, spending cuts are causing shortages in supermarkets of products including chicken, corn flour and toilet paper, said Kathryn Rooney Vera of Bulltick Capital Markets in a phone interview from Mian on Jan. 25.

“The devaluation is necessary and inevitable as the scarcity of dollars is causing worsening shortages of basic staples,” said Rooney Vera, who estimates the supply of dollars at official rates has more than halved since the election. “It’s going to come to a head pretty soon.”

The devaluation will slow the economy as a weaker bolivar affects a private sector dependent on imports, Barclays’ Arreaza said.

“In the case of Venezuela the only exporter is the government and the net importer is the private sector which means you’re going to have a transfer of funds from the private sector to the public sector,” Arreaza said. “Those funds would help close the deficit for which you’ll have a type of fiscal tightening.”

Political Risk

Any devaluation would erode living standards by driving up the price of imports, fueling inflation that’s already the region’s fastest at 20.1 percent, Munir Jalil, an economist at Citigroup Inc.’s Colombia unit, said by phone from Bogota on Jan. 25.

An official at the Finance Ministry, who asked not to be identified in accordance with government policy, said he couldn’t comment on the possibility of devaluation.

Chavez’s government has weakened the bolivar four times since introducing currency controls in 2003 to curb capital flight.

Venezuelans use a black market that currently trades at more than four times the official rate when they can’t get access to the central bank’s Sitme exchange, which sells dollars to businesses for 5.3 bolivars, or the so-called Cadivi system that sells dollars at 4.3 bolivars for priority imports.

Oil Prices

The bolivar has weakened 63 percent since it was first pegged to the dollar in 2003 following a two-month general strike that drove the economy into recession and caused Venezuelans to pull $1.2 billion out of the country. Over the past nine years, government spending has been sustained by a tripling in crude prices.

Brent crude oil prices may fall by 6 percent to an average of $105 a barrel in 2013, according to estimates by the U.S. Energy Information Administration. Venezuela’s oil basket traded at an average $13.34 discount to Brent in January, according to data compiled by Bloomberg. Venezuela needs oil at about $100 a barrel because of OPEC production quotas, Oil Minister Rafael Ramirez told reporters Jan. 28 in Caracas.